As PCs, cell phones converge, Intel finds new rival

ARM Holdings may threaten chip giant's move into portable computing

SAN FRANCISCO (MarketWatch) - As the market for personal computers has matured, Intel Corp. has moved into new battlegrounds for portable devices - bringing the semiconductor giant a roster of new rivals.

One of the main ones is ARM Holdings, a lesser known British technology company with a strong track record of designing low-cost, low-power chips for mobile phones.

The companies are likely to collide in a new market for portable computing devices that fall between laptop computers - a market Intel
INTC, +0.17%
currently rules - and cell phones, which is ARM's key market. Intel already has a strong foothold in this market with its Atom chip, which powers so-called netbooks. But a rush is on to develop new devices that can offer consumers the full computing power of PCs and the portability of a wireless phone.

"We have this hybrid market literally riding the line between the two," analyst Dean McCarron of Mercury Research said in an interview. "All the ingredients for the collision are there."

On the other hand, Intel's chips power the world's most popular PCs made by such companies as Hewlett-Packard
HPQ, -2.35%
and Dell Inc.
DELL

Intel and its allies have been pushing the netbook, the stripped down version of a notebook, and so-called MIDS, or mobile internet devices. Meanwhile, the wireless market has been moving toward smart phones such as the iPhone, BlackBerry and Palm Pre that offer Web surfing and email capabilities.

Power vs. consumption

It's a collision where two factors could prove critical: A processor's computing capability, and its appetite for electrical power. Intel is widely expected to have a huge advantage in performance, while ARM is seen as having the edge in power efficiency.

Bob Morris, ARM's director of mobile computing, portrays Intel as being in a desperate position, saying the chipmaker has no choice but take on the new market because it now finds itself boxed in in the maturing PC market.

"Intel has to go after this market, as the PC market is not growing," he said in an e-mail. "The growth market moving forward will be the mobile device market. We are closely approaching the point (if we are not there already) where people accessing the Internet from a mobile device will exceed those accessing it from a PC."

Intel Spokesman Tom Beerman disputed that view, saying the company is moving into the new market because of opportunities in the changing cell phone market.

"Cell phones are becoming more PC-like," he said. "There are more and more requirements for that device to be more PC-like. Our view is that Intel is very well suited to provide that technology."

Not a household name

Despite the ubiquity of its technology, ARM, which is based in Cambridge, UK, is not a household name, like the Silicon Valley behemoth made famous by its slogan, "Intel Inside."

"They're very invisible," Global Equities Research analyst Trip Chowdhry said in an interview. "You don't see devices saying 'ARM Inside,' or 'Powered by ARM.' I don't think they have the mass consumer awareness like Intel."

But that could change as the two companies try to move beyond their core markets into an arena where the semiconductor can play a more critical role.

"This is a kind of new developing market where the processor will get more attention than in the past," McCarron said. "Typically, nobody really cares what CPU [central processing unit] is in their cell phone."

But in an evolving market where more computing power will be key, he added, "Things like the software that's available will matter, so this is where the real battle will come up between new [chip] architectures."

To be sure, ARM, which was founded in 1990, doesn't have Intel's reach. The company has roughly 1,700 employees, compared to Intel's global workforce of 80,500.

Unlike Intel, which grew to dominate the PC chip market by developing and manufacturing its own chips, ARM has a different business model, making money through licenses and royalties from partners that use its technology.

The company's main focus has been to design low-cost, energy efficient chips for mobile devices, an important factor in a market where consumers generally expect their cell phones to be always on.

"I think the issue is: can ARM develop more performance without busting its power budget?" analyst Roger Kay of Endpoint Technologies Associates said in an interview. "And can Intel maintain enough performance as it slips into a tighter envelope?"

Beerman of Intel conceded that ARM currently has the edge when it comes to power efficiency, but he quickly added, "All of that is shifting and there's a lot of competition going around."

In fact, Kay cited Intel's research and development muscle as a key strength for the company. "That is a big card to play," he said, while ARM "is reliant on the kindness of strangers," so to speak, referring to the British company's network of partners and licensees.

But other analysts argue that ARM's business model makes it more flexible and able to adapt to shifts in the market, including the recent downturn.

Chowdhry said ARM and the cell phone makers may also have an advantage by the fact that they appear to be offering consumers more, while Intel and the PC makers are seen as moving down market.

"The market is construing that netbooks are dummified versions of the laptop so it has a negative connotation to it," he said. "Nobody wants to say you bought a dummified version of something that is good."

McCarron disagreed, saying that cell phone makers aren't simply offering an upgraded version of the mobile phone. "I see it as a completely different project. ... You're not moving up. You're moving elsewhere. That's the challenge of a new, undefined market."

Growing market opportunity

In fact, the yet-to-be-defined markets the two camps are targeting are growing steadily. For example, sales of smart phones grew 27% year-over-year to roughly 41 million units in the second quarter of 2009, even as the overall unit sales for mobile phones declined by 6% to 286 million, according to Gartner Inc.

Meanwhile, unit shipments of mini-notebooks, as Gartner calls netbooks, are on track to reach 21 million in 2009, and 30 million in 2010, even as total PC shipments are on pace to shrink by 6% to 274 million this year, Gartner said.

Analysts believe it will take time for the new market to be defined, and both camps will have much room to maneuver before the competition comes to a head.

"The question is where does that sweet spot get drawn," McCarron said.

Analyst Crawford Del Prete of International Data Corp. said he expects to see "a massive splintering of these segments with may different products targeted at different customer 'jobs.'"

"It's clear that Intel will not be able to have complete architectural dominance over all these devices," he said. "I agree that this is a place for ARM to get a foothold, but it's way too early to call them a de facto standard."

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information. Intraday data
delayed per exchange requirements. S&P/Dow Jones Indices (SM) from Dow Jones & Company, Inc.
All quotes are in local exchange time. Real time last sale data provided by NASDAQ. More
information on NASDAQ traded symbols and their current financial status. Intraday
data delayed 15 minutes for Nasdaq, and 20 minutes for other exchanges. S&P/Dow Jones Indices (SM)
from Dow Jones & Company, Inc. SEHK intraday data is provided by SIX Financial Information and is
at least 60-minutes delayed. All quotes are in local exchange time.